Boost Your Credit Score

 

 

 

 

Ever since subprime mortgages became more “sub” than “prime,” lenders have been tightening up on credit. The days of the nothing-down, no-documentation mortgage are gone.

Now homebuyers need a down payment and proof of income. What’s more, mortgage applicants need a winning credit score.

Credit scores are also weighed when you want to refinance a home loan or buy something on time. Some auto and home insurance companies will accept or reject you based on your credit score. Even if you’re accepted, the price you pay for insurance may vary according to your credit score.

Fair Isaac is the company that developed the FICO scores used by most lenders. On Myfico.com, the company illustrates how a higher score can lead to better deals on a 30-year, $300,000, fixed-rate mortgage:

The median FICO score in the U.S. is 723. Even if you’re a cut below that level, with a 660 score, you won’t pay that much more than someone with a superlative 800 score.

However, once your score dips below 660 (about 30% the U.S. population falls into this group), you’re considered more of a credit risk so you’ll pay much higher interest rates. Those with scores under 620 are likely to be quoted rates far above the norm, if they can get credit at all.
The bottom line is that your credit score has become vital to your financial well-being, so bringing up your score pays off. To do so, you should know how your score is compiled. Here’s what goes into a FICO score:

Payment history: 35% of your score. Pay your bills on time, even if you send in only the minimum amount due. Late payments will knock points off your score. Generally, a 90-day delinquency is more serious than a 60-day delinquency, but recency also counts. For example, a 60-day lateness a few months ago will hurt your score more than a 90-day late payment five years ago. This part of your score also takes into account factors such as bankruptcies, foreclosures, and wage attachments. Filing for bankruptcy, for example, can affect your score for seven to 10 years.

Amounts owed: 30%. The key here is your debt-to-credit ratio. Once you go over 35%, your score might drop, according to Steven Katz, director of consumer education for TransUnion’s TrueCredit.com. Suppose, for example, you have $20,000 worth of available credit on your credit cards. If your balance goes over $7,000 (35% of $20,000) your score might drop, even if you pay down the amount you owe by the due date.

That 35% rule may be card-by-card. For example, if you